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Emerging Market Companies

Emerging market companies

By Robert Drake, Senior Executive Leader, ASIC's MoneySmart team

Over 700 companies listed on the Australian Securities Exchange (ASX) have business operations or assets outside Australia. These companies can sometimes offer attractive returns; but it pays to find out where the company conducts business and whether this can increase the risk of losing some, or all, of your investment.

What are emerging market companies?

Some of the ASX-listed companies that operate overseas are well known and do business in established markets such as the United States or Japan.

However others operate in less established markets such as:

  • Asia (other than Hong Kong and Japan)
  • The Pacific (other than New Zealand)
  • Central or South America
  • Africa
  • Eastern Europe
  • The Middle East. 

Companies operating in these areas are known as 'emerging market companies'. Emerging market companies may:

  • have significant assets, operations and revenue streams based in an emerging market
  • have directors and senior management based overseas
  • engage an overseas auditor
  • be listed on a foreign exchange as well as the ASX.

Understand the risks

While many emerging market companies are well-managed, there can be risks associated with distance, cultural differences and variations in legal and political systems that may not affect Australian-operated companies. The risks will be different for each company.

For example, a company:

  • may need to operate across several languages, currencies and cultural systems, which can lead to miscommunication or loss of funds due to poor currency management
  • may have complex corporate structures to facilitate business, due to restrictions on foreign ownership
  • may rely too much on the guidance and connections of one key person located overseas, which can make it difficult to access reliable information or lead to that person receiving substantial financial benefits
  • may have inadequate risk management and internal controls which may result in financial loss
  • may not provide, or be able to access, reliable information on its operations and performance for auditing purposes. This may mean that financial reports do not accurately reflect the company's financial position. 

It's also important to remember that emerging market companies are not always subject to the same regulatory supervision as Australian-operated companies.

For example, if a company is registered in a country other than Australia, it may not have to comply with the Corporations Act.  This may mean that your investment has less protection than it would have if the company was registered in Australia, under our laws.

If you own shares in a company and it's the target of a takeover bid, you should carefully read the bidder's statement to see if the offer involves shares in a company with operations or assets overseas.

Before you invest

Before you invest in or vote on a takeover offer from a company operating in an emerging market, read the prospectus, annual reports and / or the bidder's statement, and consider these questions:

Assets

  • Where are the major assets or operations of the company located?
  • Are the assets held directly or indirectly through a foreign partner?

Management

  • Where are the directors and management located?
  • Does the company rely on an individual or key person to facilitate their overseas dealings or operations and how much control does that person have?
  • Does the board contain independent directors?

Company structure

  • Is the company's structure so complex that it is hard to understand where the assets are held or who has control over them?

Regulation & reporting

  • What is the regulatory regime in which the entity operates and is it similar to Australia?
  • Is the jurisdiction where the company is based or operating volatile or risky (for example, does the company need regulatory approvals from a government under an unstable political regime)?
  • Who are the company's auditors, what is their reputation, where are they located and what did they say in their audit opinion.

Related parties

  • Can you see evidence of substantial loans to and from parties related to the company? Look for any 'related party contracts' or 'material contracts' listed in the prospectus.

Visit  MoneySmart for more guidance on investing, including tips on how to read prospectuses and annual reports.

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